ocp192_en

EXECUTIVE SUMMARYThis report provides an assessment of the progress made by Greece with respect to its Second EconomicAdjustment Programme, based on the findings of a four-part joint Commission/ECB/IMF mission to Athensbetween 16-29 September 2013, 28 October-8 November 2013, 2-15 December 2013 and 24 February-17 March2014. The report examines current macroeconomic, financial and fiscal developments and assesses compliancewith programme conditionality._____________________EXECUTIVE SUMMARYGreece has made delayed, but eventually substantive progress since the last review completed in July2013. Building on the impressive fiscal consolidation effort in recent years, Greece has exceeded its fiscal targetin 2013, as a primary surplus in programme terms has been recorded. On the back of several measures takenrecently to assure achievement of its fiscal target for 2014, the scope was created for temporary support to thesocially most vulnerable. The authorities have committed to achieve the 2015 primary surplus target of 3 percentof GDP, including as needed by extending expiring fiscal measures. Reforms continue in the areas of the revenueadministration, taxation, public financial management, privatisation, public administration, health care, pensions,social welfare, education and the fight against corruption. The financial sector is undergoing a furtherrecapitalisation, attracting significant private capital. Now banks and the supervisor need to swiftly andforcefully address the high level of non-performing loans, also by fully implementing laws and by enhancinginitiatives which support the payment culture. Wages better aligned with productivity dynamics and falling unitlabour costs are improving cost competitiveness, although the performance of exports will improve visibly onlywhen reforms in other parts of the economy are fully implemented. Key structural reforms in the areas of productmarkets and business environment have been recently undertaken or are now being taken by the authorities toincrease competition and reduce administrative burden. Still very sizeable challenges remain in many areas.Nevertheless, the amount and ambition of measures implemented since the previous review completed in July2013 as well as of the new concrete commitments enshrined in the updated programme are significant.***Both soft indicators and hard data point to a bottoming out of the protracted economic recession, andconfirm the programme expectation that Greece should return to economic growth in 2014. The pace ofthe recession weakened markedly in 2013 with negative GDP growth decelerating from 6.0% year-on-year in thefirst quarter to 2.3% in the last quarter, resulting in an annual GDP contraction of 3.9% for 2013 as a whole,slightly less pronounced than what was expected last July (4.2%). Since the turn of the year, confidenceindicators continue to improve and, together with the latest industrial production releases, clearly indicate firstsigns of a recovery, suggesting an expansion in output for the first time since the autumn 2009. A return topositive annual GDP growth of 0.6% is expected in 2014, followed by a stronger recovery of 2.9% in 2015 and3.7% in 2016. Growth is expected to be supported by the structural reforms undertaken since May 2010 in labourand product markets which have enhanced competitiveness and improved adjustment capacity. This is reflectedin strengthened outlook for exports and investment. Price competitiveness continues to improve with inflationremaining well below the euro area average. The current account deficit has disappeared, with a surplus of 0.7%of GDP in 2013, a significant improvement compared to a deficit of 2.4% of GDP in 2012 (balance of paymentdefinition). The significant import contraction is expected to reverse once the economy picks up. Overall,uncertainties about the extent and speed of the economic recovery in 2014 remain significant, but are now morebalanced than seen in July 2013.Financial conditions are steadily improving. Reflecting a gradual improvement in sentiment towards Greece,government bond spreads and the stock exchange index (ATHEX) continued to recover throughout the secondhalf of 2013 and Q1 2014, the spread is now back to the pre-May 2010 level and the government issued in April2014 a new 5-year bond returning to the international bond market after four years. The deleveraging in the1